Foreclosed Property Benefits and Pitfalls

If you don’t mind extra risk to get a great deal on a property, foreclosures might be an intriguing opportunity, especially if you’re an investor. The main reason to consider foreclosed property is the chance to get a property you normally couldn’t afford for a discounted price.

This blog reviews the benefits, complications, and potential obstacles of foreclosed properties.

What are Foreclosed Properties?
A foreclosed property has been taken by a lender usually because the owner failed to pay the mortgage payments. When a lender forecloses on a property, the lender can sell the property and repay the loan with the proceeds from the sale. Foreclosed properties are considered “distressed” financially and/or physically.

If the borrower cannot work out a pre-foreclosure solution, then the property may be sold at auction, usually cash only, held by a trustee or sheriff. At the auction, if no one bids higher than the default amount, the lender takes the property. Then it’s called “real estate owned (REO).”

Benefits of Buying Foreclosed Properties
Why are foreclosed properties a good opportunity? You’re dealing with the lender or bank, not the owner. Lenders want to quickly get as much of the original mortgage amount as possible. This gives foreclosure buyers bargaining power.

Advantages of buying foreclosed properties include:

Bargain opportunity: You could get a property at below market value.

Get a larger property for less money.

Find a cheaper house in a high-end neighborhood.

The lender is eager to get rid of the distressed property.

With REOs, the lender usually clears other liens on the property, so this is safer than an auction.

Opportunity for big return on investment if the home value appreciates.

Pitfalls of Buying Foreclosed Properties
While there’re great opportunities for smart, brave purchasers to get more house for less money, there are several downsides to a foreclosure transaction. Generally, there are more risks and uncertainty involved with distressed properties. And you have to follow the lender’s timeline and meet all of the lender’s requirements.

The common pitfalls of foreclosure properties include:

The sale is as-is, so the lender won’t allow contingencies.

Limited opportunity to inspect the property as it may be boarded up

No seller disclosure requirements regarding property condition

Bad condition: The delinquent borrower likely failed to maintain the property. The house may have sat empty during the long foreclosure process.

In some states, the right of redemption allows delinquent borrowers to reclaim the property during the foreclosure process by paying the past-dues amounts and fees.

Slower and more complicated process: This means lots of paperwork. Expect slow response times with the bank and others.

Competition and bidding wars: Savvy investors have a nose for attractive deals, so be prepared for high demand and more offers.

Need for unconventional financing

Additional costs due to needed repairs and the higher likelihood of additional liens

Tips for Buying Foreclosed Properties

So, if you’ve weighed the pros and cons and are ready to make the leap, be prepared and do your homework. You may be competing with experienced investors. As with all real estate purchases, first get your finances in order.

Other tips include:

Check public records and the county courthouse websites for foreclosure sales

Get pre-approved for a loan

Register for foreclosure auctions and observe a few to learn the process.

Hire a real estate agent who specializes in foreclosed properties. He or she will know where to look for distressed properties, have contacts with lenders and local real estate professionals, and can guide you through this unconventional sales transaction.

Get a home inspection or have your agent find a recent inspection

Have the title searched for additional liens

Be prepared to live somewhere else while repairs and renovations are completed

As you can see, you’ll need patience and tolerance for risk and uncertainty. Preparation and the advice of experienced real estate professionals are important for all real estate transactions, but this is especially true for foreclosed properties.

Want to learn more about the various facets of the real estate industry or take care of continuing education requirements in real estate? All you need is 360training.com: the convenient place to get all the on demand real estate training you need. Plus, the courses are super easy to use and all online. Enroll today!

Michelle Roebuck is a graduate of the University of Texas at Austin with a Bachelor’s degree in Communications. After spending more than a decade as a journalist and on-air personality in radio and TV, Michelle moved on to marketing and PR. She has a deep background in retail and food service merchandizing and operations. As a marketing manager for food services in a large suburban school district, Michelle learned the intimate details of kitchen management and the critical importance of safety in all aspects of operation. Michelle is married with two boys and enjoys exercising, shopping, eating out, watching football and traveling with her family.